Is deregulation to blame?

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Energy Secretary Sharon Garin remarked that our oil industry deregulation law is good only in normal times but problematic during a crisis.

Almost on cue, some legislators now want to repeal the law and go back to the system of going to a government regulatory body for permission to raise fuel retail prices.

I get the feeling that our officials never learn from history. We now have a deregulated system because the regulated one didn’t work. No private company will want to sell at a loss. Is that too difficult to understand?

I went through my files and found this news report back in 2009.

Singapore (Platts) — 28 Oct 2009/745 am EDT/1145 GMT

GASOIL: As oil companies in the Philippines came to terms with the government’s executive order mandating a freeze on fuel pump prices to levels prevailing on Oct. 15, Petron issued a statement to the Philippine Stock Exchange Wednesday outlining the consequences of the move.

“Some oil players may opt to stop selling fuel products altogether instead of selling at a loss. It would be impossible for Petron to supply this shortfall,” the country’s largest oil retailer said.

Petron also said that with this price control, it was estimated to incur a net loss of P1.5 billion ($31.6 million) in the fourth quarter of 2009.

Belt tightening measures were already seen Wednesday, with Petron buying only one of the two gasoil cargoes it had originally sought via a tender released on Oct. 23, the same day the government issued the executive order. The oil company had initially stated it was seeking two 250,000-barrel cargoes of 500 ppm sulfur gasoil over Nov. 9 to 13 and 22-26, but canceled the latter. End of news report.

It is quite basic. Only a government entity can be mandated to take a hit for the national interest. The government can nationalize our oil industry but after the flood control scandal, no sane Filipino would trust a government entity with such an important responsibility.

I agree that the current system is perhaps a bit too chaotic with too many players who are not adequately capitalized to take risks like what Petron is now doing as a refiner and distributor of petroleum products.

The just-in-time weekly replenishment of stocks from the regional refineries in Singapore, China, South Korea, etc. is alright in good times. But when supply becomes iffy because of a crisis like what is happening now at the Strait of Hormuz, there is nothing we can do.

But price control will make things worse. Products will just disappear.

And who will regulate? In the old days it was the Oil Industry Commission who dictated retail prices. The Energy Regulatory Commission will be the likely regulator now. Unfortunately, the ERC can’t even keep up with its regulatory obligations that are now limited to the power sector.

Perhaps, a more reasonable amendment to the Oil Industry Deregulation Law is to increase the capitalization requirements of industry participants. This will enable them to truly abide with the mandated stock reserve requirement which should be increased to at least a month.

Besides, Petron has shown that it is possible to operate in the national interest. That’s because they kept the refinery going with its capacity to produce the petroleum products we need.

Here is how former congressman Joey Salceda views it:

“In the week of Feb. 24 to March 2, Flying V and Seaoil were the cheapest RON 95 brands in the NCR at P54 per liter. Petron sat at P55.80. Shell was already at P67. Three weeks later, after the crisis had fully transmitted into import prices: Flying V P69, Seaoil 70, Petron P70.50, Shell P76.70, Caltex P75.30.

“Everyone went up. But the spread is the story. Petron ended the crisis period within one peso of the cheapest brands in the country. Shell and Caltex, pure finished-product importers, landed P6-P7 above Petron.

“When a crisis hits and you are importing finished gasoline, you pay whatever Singapore is charging that week. When you refine domestically, you are processing crude contracted before the spike, adding value here, employing Filipino workers here and selling at a cost structure that does not fully track the spot market in real time. The refinery is a buffer.

“It is, in fact, the closest thing the Philippines has to a strategic petroleum reserve…

“A refinery holds crude inventory by the nature of its operations. It processes that inventory on a schedule that does not move in lockstep with daily spot prices. When a crisis hits, it does not immediately reprice its entire supply chain the way a finished-product importer must. That is not a coincidence or a courtesy. That is the structural advantage of domestic refining…

“It just demonstrated, over three weeks of crisis, that it measurably insulates Filipino consumers from full price transmission.”

If the government wants to have a strategic petroleum reserve, it should be ready to invest in storage facilities within the Petron refinery in Bataan and cover the inventory carrying cost of the crude in the reserve.

Alternatively, the government could buy its own crude and charter very large crude carriers to serve as floating storage. We did that in the olden days, sometimes having one of PNOC’s two VLCCs as floating storage. A VLCC has capacity for two million barrels of oil.

Congressman ssm Joey is wrong to say that we never had strategic petroleum reserves. We did, back in the late 70s and 80s. But it was admittedly simpler then because everything was under PNOC and we had a special fund to cover necessary costs.

Repealing the current deregulated system doesn’t increase our energy security and may even make it worse. Pump prices must reflect the market or oil companies will stop importing. Politicians shouldn’t grandstand on this issue.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco